The stock market has started to slide. Major indexes such as the S&P 500 and Nasdaq have slipped around 5% off their recent highs, and September was the roughest month for markets so far this year. In particular, many widely-held technology and growth stocks sold off, causing investors to reevaluate their strategies. In some cases, traders are turning to popular penny stocks to make up for recent losses.
While there is certainly appeal to a quick profitable trade, people should be careful. Most penny stocks ended up as such due to problems with their business models or management teams. In general, high-quality companies tend to trade for more than a couple bucks per share.
This caution goes doubly so when penny stocks are widely talked about. When something shoots up while getting a ton of buzz on Reddit or social media, it’s often a precursor to a major dump. With that in mind, you should be particularly careful with these seven popular penny stocks heading into October:
- Farmmi (NASDAQ:FAMI)
- Houston American Energy (NYSEAMERICAN:HUSA)
- Camber Energy (NYSEAMERICAN:CEI)
- China Evergrande Group (OTCMKTS:EGRNF)
- Sonoma Pharmaceuticals (NASDAQ:SNOA)
- ReWalk Robotics (NASDAQ:RWLK)
- The Alkaline Water Company (NASDAQ:WTER)
Popular Penny Stocks to Avoid: Farmmi (FAMI)
Farmmi has become one of the most popular penny stocks out there. And it’s truly a penny name, shares are currently going for less than 40 cents a pop. On Friday, Oct. 1 alone, Farmmi incredibly saw more than 500 million shares trade hands. Folks are rushing to speculate on a comeback for the Chinese mushroom producer.
That’s right, Farmmi cultivates and distributes dried whole and sliced mushrooms for the domestic market and international export. The fungi market has not been a friendly one in recent years; Farmmi’s profitability metrics have steadily declined and it has struggled to generate profits or cash flow as of late. Add in the meltdown in Chinese stocks more generally this year and FAMI stock has lost most of its value.
Now, it’s not all bad news for Farmmi. As our David Moadel recently pointed out, Farmmi has won some new orders to export its mushrooms. This could potentially help reverse the company’s sinking operating results. Still, given current market conditions for Chinese companies, a small, niche agricultural products company with volatile results is not really compelling as an investment. It’s rather strange that people have gravitated to this company, of all things, to bet on a comeback in Chinese stocks.
Houston American Energy (HUSA)
The energy market has come roaring back lately. Natural gas hit its highest price in nearly in a decade, and oil is rallying sharply as well. Visible signs of stress, such as fuel shortages in the United Kingdom and China, are building further enthusiasm for the sector. That’s all good news for investors in oil and gas companies.
However, oil and gas — particularly among smaller firms — is a perilous sector. Even in the best of times, many exploration and production (E&P) companies simply don’t have the resources to earn profits unless commodity prices go sky high. Houston American is one such small oil firm that remains unattractive even with the oil rally.
The one good thing for the company is that it has no debt. However, its business is quite limited in scope. Through the first six months of the year, Houston American generated $632,487 in revenues and lost $313,820 in the course of doing so. That’s not great. It has just $10.7 million in shareholder equity as of its last filing.
Yet the market is currently assigning the company a $23 million market capitalization for just half than in assets. And the oil business is still running unprofitably even in an oil boom. Even if revenues doubled, the company would still be generating just $2.5 million in annual revenues or so. Against that backdrop, today’s valuation seems rather tenuous.
Popular Penny Stocks to Avoid: Camber Energy (CEI)
Camber Energy is another long-forgotten oil and gas dinosaur that has suddenly roared back to life. The firm used to be called Lucas Energy and traded for millions of dollars per share on a reverse split-adjusted basis. After changing names and vaporizing nearly all of shareholders’ capital, Camber is back at it again.
Its latest efforts are two-fold. One, it executed a reverse merger with Viking Energy (OTCMKTS:VKIN), a small U.S. oil producer with a troubled balance sheet. As of June 30, Viking had a shareholder deficit of $15 million, implying that the company will likely need to issue equity or otherwise come up with something to meet its funding needs. Second, Viking partnered with a clean energy firm in the carbon-free power generation field. The deal had no stated financial metrics and seems unlikely to be significant to Camber’s near-term results, however.
The real reason CEI stock is surging has little to do with Camber or Viking’s actual business. It’s rather because certain well-known stock influencers on social media are tweeting about the company nonstop, hoping to provoke a short squeeze. Once the buzz ends, however, Camber will still be just another small money-losing energy firm with its shares trading back down to where they were a month ago. In other words, look for 50-75% downside ahead in CEI stock.
China Evergrande Group (EGRNF)
China Evergrande Group is the country’s largest residential property developer. It is also one of the world’s largest debtors, with a reported $300 billion or so of obligations. Unfortunately for the firm, its ambitions ran well ahead of its financial capacity. Evergrande went into fields such as electric vehicles (EVs), theme parks, health care, and even owning a soccer club.
The core cash flows from its apartment-building business weren’t enough to keep up with all these investments, however. Evergrande has now missed some interest payments and appears to be on the brink of bankruptcy. Its implosion has been such a dramatic event that it helped cause a sell-off in stocks around the globe.
While Evergrande appears to be heading for a messy ending in bankruptcy, traders haven’t given up on its pink sheets listing just yet. EGRNF stock fell from $2 at the start of the year to just 30 cents a week ago. Recently, however, the stock spiked back up to 50 cents before slipping back.
The truth is, however, that these shares are highly unlikely to hold much or any value. Evergrande’s bonds are trading way in junk territory, and don’t forget that creditors have to be repaid before stock holders get anything. The firm’s plummeting bond prices suggest that the stock is nearly worthless. On top of that, it’s harder for shareholders to maintain a claim on assets in bankruptcy overseas than it might be in a U.S. bankruptcy court. Day traders are having their fun with Evergrande shares, but they’re much too risky for anything beyond that.
Popular Penny Stocks to Avoid: Sonoma Pharmaceuticals (SNOA)
Sonoma is a small pharmaceutical firm. It makes stabilized hypochlorous acid (HOCl) products. These have various uses in fields such as treatments of the eyes and mouth, wound care, and animal health.
The company has shown flat operating results in recent years, with annual revenues coming in around $17-$19 million every year since 2018. This hasn’t been enough for the company to reach sustainability; it generates consistent operating losses.
SNOA stock, which has lost 85% of its value over the past five years, suddenly sprung to life last week. On first glance, the news was promising; Sonoma will be selling products on Amazon (NASDAQ:AMZN).
Upon further reflection, however, this isn’t actually a big deal. It’s not hard for companies to list goods on Amazon. It’s one thing to be available there, it’s quite another to have strong consumer demand. SNOA stock has already given back most of its Amazon-induced gains and will likely continue trading lower until its actual operating results improve.
ReWalk Robotics (RWLK)
ReWalk Robotics makes a bionic walking assistance system. It effectively serves as a wearable robotic exoskeleton that helps give mobility to people with disabilities.
While the technology sounds promising, its commercial prospects seem rather modest. The company’s revenues peaked at $8 million in 2017 and have declining since then. Not surprisingly, the company runs sizable operating losses.
RWLK stock doubled in late September. However, there wasn’t much in the way of tangible news to support such a run. Rather, it appears to have come simply from a bunch of social media activity. ReWalk shares quickly fell back after that brief surge. While traders can hope for another short squeeze, there’s nothing much going on fundamentally to justify the heightened stock price volatility.
Popular Penny Stocks to Avoid: The Alkaline Water Company (WTER)
Is your diet too acidic? If so, The Alkaline Water Company might have the answer. The company intends to provide consumers with health-focused beverage options. The company’s premise is that the pH balance of beverages is not ideal and that people need more alkaline to balance out their acids.
To that end, Alkaline Water created a water that includes Pink Himalayan rock salt. This is supposed to offer health benefits and taste better than tap or normal bottled water. Taste, of course, is a personal preference. However, science has shown little to no evidence in support of the purported benefits of alkaline water.
With the company’s main business failing to take off in recent years, the firm has started to pivot. Not too surprisingly, the firm decided that cannabis was the answer and launched CBD water in 2020. However, Alkaline Water was late to that party, and sales have failed to move the needle.
To its credit, the company is still growing its revenues, which is promising. But Alkaline Water has been losing more money every year even as sales grow. Meanwhile, it is flooding shareholders with dilution; WTER stock’s share count is up from 16 million to 70 million over the past four years. Long story short, ignore the recent buzz, WTER stock isn’t going to quench your thirst for a good investment.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.